Strategies for Entrepreneurship CHAPTER 6 Strategies for Entrepreneurship and Innovation

Learning Objectives Understand the importance of entrepreneurship and organizational entrepreneurship Be able to create a simple business plan Understand the steps in the creation of an entrepreneurial venture Know the pitfalls associated with new venture failures Consider the various options for new venture funding Select an appropriate structure for an internal venture Be able to create a plan for fostering innovation in an existing firm

Entrepreneurship Entrepreneurship is the creation of new business Opportunity recognition or creation (entrepreneurial discovery is the intersection of a need and a solution) Assembling resources to pursue the opportunity, including capital (typically associated with a business plan) Managing activities that bring a new venture into existence Some ventures are complete start-ups Other ventures occur within existing firms Organizational entrepreneurship or “intrapraneurship”

Entrepreneurs Opportunists Resourceful Creative Visionary Hardworking Recognize and take advantage of opportunities Resourceful Creative Visionary Hardworking Optimistic Independent Thinkers Excellent Leaders Dreamers

What’s in a Business Plan? Executive Summary Business Description Environmental Analysis (see next slide for details) Resource Analysis (with a focus on the entrepreneur) Functional Plans Financial Projections Implementation Schedule End-game Strategy Risk Analysis

What’s in the Environmental Analysis for a Business Plan? Market analysis Existing competitor analysis Supplier analysis Evaluation of potential substitutes Discussion of entry and exit barriers Relevant government regulations and regulators Financial condition of the industry Availability of funding Overall economic factors for the host country Availability of technology

Sources of Capital for Entrepreneurs Commercial Banks Personal Contacts Venture Capitalists Corporate Partnerships Business Angels Initial Public Offerings

Initial Public (IPO) Offering Process Select Underwriter Draft Letter of Intent Assemble the Syndicate Determine Offering Price Place the Offering Draft Prospectus Revise & Print the Prospectus Develop Business Plan Due Diligence Present to Potential Investors Board Approval Determine Offering Size Time

First Year Agenda for Entrepreneurial Startups Financial Management Obtain initial capital Establish systems to track revenues and expenses and control costs. A record-keeping system must be established that will satisfy the demands of investors, creditors and the internal revenue service.

First Year Agenda for Entrepreneurial Startups Marketing Selection of initial product/service offering. Selection of initial market. Targeted advertising. Product / service Development Establishment of a system for collecting feedback from early customers. Continuous improvement is essential.

First Year Agenda for Entrepreneurial Startups Resource Acquisition Site selection and construction. Acquisition of machinery, furnishings, information systems, utilities and supplies. Contracts with suppliers. Process Development Focus is on production and operations management to ensure efficiency, quality and continuous improvement.

First Year Agenda for Entrepreneurial Startups Management and Staffing Recruitment of motivated, well-trained employees Selection of managers. Assignment of responsibilities Establishment of personnel policies Training Compensation system, which may include benefits. Supportive culture.

First Year Agenda for Entrepreneurial Startups Legal Requirements Legal form (sole proprietorship, partnership, corporation). Other legal requirements and filing of forms. Patents and trademarks if necessary.

Legal Forms of Business Sole proprietorship The entrepreneur is the owner and legally liable for the venture in its entirety

Legal Forms of Business Partnership Each of the partners contribute resources such as money, physical goods, services, knowledge and relationships Limited partnership means that management responsibility and legal liability of partners are limited, except that one partner must be a general partner with unlimited liability

Legal Forms of Business Corporation Risk of a shareholder is limited to investment in stock However, the tax advantages of a partnership are lost S Corporations allow some partnership-type tax advantages, but they must meet restrictions and have few shareholders

Internal and External Problems Faced by Entrepreneurs Customer Contact (27.3%) Market Knowledge (19.3%) Market Planning (14.4%) Location (11.1%) Pricing (8.4%) Product Issues (7.6%) Competitors (6.3%) Expansion (5.5%) Internal Problems Adequate Capital (15.9%) Cash Flow (14.9%) Facilities / Equipment (12.6%) Inventory Control (12.3%) Human Resources (12.0%) Leadership (11.1%) Organizational Structure (10.8%) Accounting Systems (10.4%)

Most Common Sources of Entrepreneurial Failure Poor Management Skills Lack of Adequate Capitalization Product/Service Problems External Market Conditions

Factors Encouraging or Discouraging Innovation Factors Encouraging Innovation Vision and culture that support innovation, personal growth and risk taking Top management support and organizational champions Teamwork and collaboration; a flat management hierarchy Decentralized approval process The ideas of every employee are considered valuable Excellent communications Innovation grants and time off to pursue projects Large rewards for successful entrepreneurs Focus on learning

Factors Encouraging or Discouraging Innovation Factors Discouraging Innovation Rigid bureaucracy and conservatism in decision making Absence of management support or champions Authoritarian leadership and traditional hierarchy Difficult approval process Only the ideas of certain people (researchers or managers) are given attention Closed-door offices Inadequate resources devoted to entrepreneurial activities Harsh penalties for failure Exclusive emphasis on measurable outcomes

Designs for Corporate Entrepreneurship Special Business Units Complete Spin-off Unrelated Related Operational Relatedness Nurturing and Contracting Direct Integration Important Not Important Strategic Importance Adapted from R.A. Burgelman, “Designs for Corporate Entrepreneurship in Established Firms,” California Management Review,26: 3 (1984) used with permission.

E-Commerce Business dealings that are electronically based Dot-Coms E-tailing (retailing through the Internet) Exchanging data Business-to-business buying and selling E-mail communications Dot-Coms Internet-based businesses Early race to attract “eye balls” Many of the failures were due to inadequate business models for sustaining revenues and producing profits Internet is an increasingly important business tool Retail sales are dramatically increasing A wide variety of applications Investors have become wary of hollow promises Information technologies continue to change

Common Growth Tactics Internal Growth Tactics Market Penetration: Increase market share in current business Market Development: Repositioning a product or service to appeal to a new market or markets. Product or Service Development: Firms modify existing products and services or develop new ones for existing or new market segments. Growth Tactic That May Be Internal or External Vertical Integration: The firm moves forward towards its customers or backwards towards its suppliers on its industry’s vertical supply chain.

Common Growth Tactics External Growth Tactics Horizontal Acquisition: Purchase a company in the same line of business. Related Acquisition: Purchase a company with common or complementary products, services, markets, or technologies. Unrelated Acquisition: Purchase a company with no commonality or complementarity between products, services, markets, or technologies. Joint Venture: Cooperative endeavor resulting in a new, jointly-owned firm.

Stability Strategies A “no growth” philosophy is hard to defend for public corporations However, such a philosophy is acceptable if: All relevant stakeholders agree, as in a small family business A growth strategy is ineffective, such as in a mature or declining market with high exit barriers The firm is restructuring (however, future growth is anticipated after the restructuring is complete)

Major Concepts in Chapter 6 Entrepreneurships involves the creation of new business Entrepreneurship can involve a new start-up or organizational entrepreneurship, the creation of new business within an existing firm Entrepreneurial tasks include opportunity recognition or creation, assembling resources, and managing the activities that bring the venture into existence Entrepreneurial discovery is the intersection of a need and a solution

Major Concepts in Chapter 6 A business plan is at the center of an entrepreneurial venture. It forces the entrepreneur to think through the details of the venture and determine its feasibility A business plan includes an executive summary, a description of the proposed venture, an analysis of the environment, a resource analysis (with special emphasis on the entrepreneur), functional plans such as marketing and operations, financial projections, a schedule for major events, an endgame strategy and an analysis of risks

Major Concepts in Chapter 6 Obtaining start-up capital is one of the most difficult problems facing an entrepreneur Lack of management skills is a primary source of failure of entrepreneurial ventures Firms that foster organizational entrepreneurship tend to have a vision, culture and top management that support innovation, organizational champions, teamwork and collaboration, a flat management hierarchy, a decentralized approval process, respect for ideas, excellent communications, resources for entrepreneurial activities, rewards that encourage innovation and a focus on learning

Major Concepts in Chapter 6 The optimal design for an internal venture depends on the strategic importance of the venture and how closely related it is to current activities Organizations can pursue internal growth strategies, external growth strategies or a combination. Internal growth strategies provide more control but they tend to be slower